We present a theory explaining the impact of ability tracking on academic performance based on grading policies. Our model distinguishes between initial ability, which is mainly determined by parental background, and eagerness to extend knowledge. We show that achievements of low ability...

Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of...